ParkCentral v. Porsche: The Second Circuit Signals New Lines of Defense to Extraterritorial Securities Fraud Claims

In ParkCentral Global Hub Ltd. v. Porsche Automobile Holdings SE (“ParkCentral”), the US Court of Appeals for the Second Circuit held that domestic securities transactions that did not involve the foreign defendant, whose alleged fraudulent actions occurred largely abroad and related to price movements in non-US securities, were beyond the territorial scope of Section 10(b) of the Securities Exchange Act of 1934. While the Second Circuit firmly declined to provide a “bright-line” rule as to when a claim is so foreign as to be beyond the scope of US securities laws, the holding is another in a series of Second Circuit decisions that should make it harder for claimants to sustain US securities claims against non-US issuers of non-US securities. However, it also shows that the extraterritorial scope of Section 10(b) is a fact-sensitive question that will require careful analysis in each case.

The Facts: Extraterritorial Actions Relating to Domestic Swap Trades

The ParkCentral plaintiffs included more than 30 international hedge funds that entered into “securities-based swap agreements” (the “swaps”) indexed to the price of Volkswagen AG (“VW”) shares as recorded on foreign exchanges. The plaintiffs alleged that Porsche Automobil Holding SE (“Porsche”), a VW shareholder, made fraudulent statements with respect to its intention to buy more VW shares, which in turn affected the value of the swaps. Porsche’s statements occurred primarily in Germany, though some statements were alleged to have been “accessible in the United States” and repeated by other defendants here. Although Porsche was not involved in any of the trades, the plaintiffs argued that because their swaps were “domestic transactions in other securities,” their claims were sufficiently territorial under Morrison v. National Australia Bank Ltd.

August 2014
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In ParkCentral Global Hub Ltd. v. Porsche Automobile Holdings SE (“ParkCentral”),1 the US
Court of Appeals for the Second Circuit held that domestic securities transactions that did
not involve the foreign defendant, whose alleged fraudulent actions occurred largely abroad
and related to price movements in non-US securities, were beyond the territorial scope
of Section 10(b) of the Securities Exchange Act of 1934. While the Second Circuit firmly
declined to provide a “bright-line” rule as to when a claim is so foreign as to be beyond the
scope of US securities laws, the holding is another in a series of Second Circuit decisions
that should make it harder for claimants to sustain US securities claims against non-US
issuers of non-US securities. However, it also shows that the extraterritorial scope of
Section 10(b) is a fact-sensitive question that will require careful analysis in each case.
The Facts: Extraterritorial Actions Relating to
Domestic Swap Trades
The ParkCentral plaintiffs included more than 30 international hedge funds that entered into
“securities-based swap agreements” (the “swaps”) indexed to the price of Volkswagen
AG (“VW”) shares as recorded on foreign exchanges.2 The plaintiffs alleged that Porsche
Automobil Holding SE (“Porsche”), a VW shareholder, made fraudulent statements with
respect to its intention to buy more VW shares, which in turn affected the value of the
swaps. Porsche’s statements occurred primarily in Germany, though some statements were
alleged to have been “accessible in the United States” and repeated by other defendants
here.3 Although Porsche was not involved in any of the trades,4 the plaintiffs argued that
because their swaps were “domestic transactions in other securities,”5 their claims were
sufficiently territorial under Morrison v. National Australia Bank Ltd.6
ParkCentral v. Porsche:
The Second Circuit Signals New
Lines of Defense to Extraterritorial
Securities Fraud Claims
Owen Pell
Partner, New York
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opell@whitecase.com
Gregory M. Starner
Partner, New York
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gstarner@whitecase.com
Colin Diamond
Partner, New York
+ 1 212 819 8754
cdiamond@whitecase.com
Francis Fitzherbert-Brockholes
Partner, London
+ 44 20 7532 1400
ffitzherbert-brockholes@whitecase.com
1 No. 11-397-CV L, --- F.3d ---, Slip Op. (2d Cir. Aug. 15, 2014) (“Slip Op.”).
2 Id. at *1, 5. The Court noted that VW shares were traded on exchanges in Germany, Switzerland, Luxembourg and
the United Kingdom. Id. at *21. Although VW had sponsored unlisted ADR programs, the Court noted that the
holder of an ADR “is not the title owner of the underlying shares” and that none of the swaps had been indexed
to the ADRs. Id. at *21 n.9.
3 Id. at *5. The Court also noted that Porsche was subject to regulation in Germany and that German authorities had
investigated Porsche with regard to the allegations about its statements about VW. Id. at *16.
4 Id. at *21.
5 Plaintiffs included US entities and alleged that the swaps were entered into in the United States with US
counterparties, and that the swaps contained New York choice of law and forum clauses. Id. at *12, *20 – 21.
6 561 U.S. 247 (2010).
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The defendants’ motion to dismiss the claims was granted by
the lower court because the court found that “the swaps were
essentially transactions in securities on foreign exchanges”
and hence beyond the reach of US securities laws.7
The Decision: Applying Morrison’s
“Transactional Test” to Domestic Trades
The Second Circuit affirmed the dismissal, but on other—and
broader—grounds. The Court first reviewed the Morrison decision,
noting that the Supreme Court adopted a “transactional test”
under which Section 10(b) applies only to “domestic” transactions,
which are either “transactions in securities listed on domestic
exchanges” or “domestic transactions in other securities.”8
The Court then reviewed its prior decision in Absolute Activist
Value Master Fund Ltd. v. Ficeto, in which it wrestled with
the issue of when a securities transaction not involving US
exchanges is “domestic” for purposes of stating a Section 10(b)
claim.9 In that case, non-US hedge funds purchased shares which
only traded over-the-counter directly from US issuers. Holding
that plaintiffs had to replead their claims to add more facts, the
Second Circuit in Absolute Activist concluded that the identity of
the securities at issue was not determinative to establish whether
the transactions at issue were “domestic.” The Court also refused
to find as determinative the identity of the buyer and seller, the
identity of the broker or whether alleged fraudulent acts occurred
in the United States.10
Turning to the case at hand, the Court focused on Morrison’s
statement that Section 10(b) applies to “domestic transactions in
other securities” and whether this means that alleging a domestic
transaction is only necessary—or is in all cases sufficient to
state a domestic Section 10(b) claim. The Court rejected the idea
that alleging a domestic transaction is sufficient because if that
were the case, then Section 10(b) would have broad application
“regardless of the foreignness of the facts constituting the
defendant’s alleged violation.”11 This in turn also would “seriously
undermine” Morrison’s “insistence” that Section 10(b) was to
have “no extraterritorial application.”12 Thus, the Court held that
“while [Morrison] unmistakably made a domestic securities
transaction (or transactions in a domestically listed security)
necessary to a properly domestic invocation of §10(b), such a
transaction is not alone sufficient to state a properly domestic
claim under the statute.”13
Applying this principle to this case, the Court stressed that
domestic swaps could not be the basis for a Section 10(b)
claim with respect to “conduct that occurred in a foreign
country, concerning securities in a foreign company, traded
entirely on foreign exchanges.”14 Although the Court refused to
decide whether the swaps were truly “domestic transactions”
under Absolute Activist, it did hold that the facts alleged did not
allege a claim under Section 10(b) because the claims “concern
statements made primarily in Germany with respect to stock in
a German company traded only on exchanges in Europe.”15 Thus,
although plaintiffs alleged that “the false statements may have
been intended to deceive investors worldwide,” the “relevant
actions in this case are so predominantly German as to compel the
conclusion” that no claim for relief is stated under Section 10(b).16
Having rejected the claim, the Court then went to great
lengths to make clear that its holding did not rule out all claims
relating to similarly structured swaps or all claims with “foreign
elements.”17 Rather, the Court stressed that there was no
bright-line test under Morrison, especially in “a world of easy
and rapid transnational communication and financial innovation,
[where] transactions in novel financial instruments—which
7 Slip Op. at *6.
8 Id. at *29.
9 677 F.3d 60 (2d Cir. 2012).
10 677 F.3d at 68-69, cited in Slip Op. at *33. Although not cited in ParkCentral, the Second Circuit recently clarified its decision in Absolute Activist to make clear that Section
10(b) cannot reach claims relating to securities traded on non-US exchanges simply because (i) the issuer is cross-listed on a US exchange or (ii) the order for the securities
at issue was placed with a US broker. City of Pontiac Policemen’s & Firemen’s Retirement Sys. v. UBS AG, 752 F.3d 173 (2d Cir. 2014).
11 Slip Op. at *39, *41.
12 Id. at *41.
13 Id. at *40. The Court also noted that a contrary conclusion “would require courts to apply the statute to wholly foreign activity clearly subject to regulation by foreign
authorities solely because a plaintiff in the United States made a domestic transaction, even if the foreign defendants were completely unaware of it.” Id. at 41. Here, that also
could raise serious issues of competing regulatory regimes as between US and German law. Id. at *41 – 42.
14 Id. at *42.
15 Id. at *44.
16 Id.
17 Id. at *45.
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market participants can freely invent to serve the market’s needs of the moment—can
come in innumerable forms of which we are unaware and which we cannot possibly
foresee.”18 Rather, noting that extraterritoriality is an “elusive question,” the Court said that
each case will bear “careful attention to the facts…and to the combinations of facts” as
courts formulate rules to apply Morrison.19
Implications
ParkCentral is another in a series of Second Circuit decisions (including City of Pontiac) that
should make it harder for claimants to sustain US securities claims against non-US issuers
of non-US securities. By stressing that a domestic transaction is only one necessary
element of a Section 10(b) claim, the case makes clear that plaintiffs in securities fraud
cases must clear two distinct hurdles:
■■ Absent a security traded on a US exchange, the plaintiffs must show a domestic
transaction—which under City of Pontiac and Absolute Activist will not be a simple
geographic test tied to where parties or brokers are located, but will involve an analysis
of the underlying securities and transactions surrounding the transactions at issue
in the claim.
■■ The plaintiffs also must show that the Section 10(b) claim itself is sufficiently domestic
to come within Morrison’s stricture that Section 10(b) was not intended to have
extraterritorial reach.
As a result, ParkCentral should make it harder for claims to be asserted as to non-US
issuers using Regulation S for offshore sales to non-US persons and using Rule 144A
for onshore sales to US investors because those types of claims often involve so many
non-US facts and elements, and the decision did not give significant weight to the alleged
local US statements and activities relating to the transactions.
At the same time, however, the Second Circuit’s ruling makes clear that applying Morrison
is not simple. Rather, this is a fact-based inquiry that will allow for nuanced results from
case to case, as courts weigh the nature of the security at issue, its connection to the
United States, and how the defendant’s alleged improper conduct relates to the securities
in question and the alleged claims. To the extent that this sounds like the “conduct
and effects” test rejected in Morrison, the Second Circuit is arguing that this analysis
is inherent in determining the extraterritorial reach of a Section 10(b) claim.
18 Id. at *46.
19 Id. Recognizing that its decision represented an elaboration of the Court’s thinking on Morrison, the Court
remanded the case to the lower court to allow the plaintiffs an opportunity to amend their claims to plead
additional facts that might state a claim. Id. at *6 – 7, *48.

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